<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 24, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 0-27130
NETWORK APPLIANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 77-0307520
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
2770 SAN TOMAS EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
(408) 367-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
<S> <C>
none none
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (no par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of May 31, 1998, was $984,774,626 (based on the closing price for
shares of the Registrant's common stock as reported by the Nasdaq National
Market for the last trading day prior to that date). Shares of common stock held
by each executive officer, director, and holder of 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On May 31, 1998, 33,802,814 shares of the Registrant's common stock, no par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
October 8, 1998, which will be filed with the Securities and Exchange Commission
not later than 120 days after April 24, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section of this Annual Report on Form 10-K titled "Item 1. Business,"
beginning on page 2, discusses risk factors in numerous places, including the
section titled "Other Factors Affecting the Company" and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). MD&A should also be read in conjunction with the
audited, consolidated financial statements and the notes thereto included in the
section titled "Item 8. Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of income
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net Sales................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 40.7 40.8 44.1
----- ----- -----
Gross margin........................................... 59.3 59.2 55.9
----- ----- -----
Operating Expenses:
Sales and marketing....................................... 25.7 26.0 27.3
Research and development.................................. 10.0 9.6 10.2
General and administrative................................ 3.9 4.4 5.5
Purchased in-process technology and related compensation
charge................................................. -- 11.3 --
Litigation settlement..................................... -- 4.6 --
----- ----- -----
Total operating expenses............................... 39.6 55.9 43.0
----- ----- -----
Income from Operations...................................... 19.7 3.3 12.9
Other Income, net........................................... 0.5 1.0 1.3
----- ----- -----
Income before Income Taxes.................................. 20.2 4.3 14.2
Provision for Income Taxes.................................. 7.6 4.0 --
----- ----- -----
Net income............................................. 12.6% 0.3% 14.2%
===== ===== =====
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales -- Net sales increased to $166.2 million in fiscal 1998 from
$93.3 million in fiscal 1997, an increase of 78.0%. The increase in net sales
was principally attributable to a higher volume of filers shipped. The increase
in unit shipments resulted primarily from the Company's expansion of its direct
sales force and the introduction of new products during June and July 1997,
particularly the enterprise-class NetApp F630, the NetApp F520 and the NetApp
F230. Net sales for fiscal 1998 were also positively impacted by a shift in
product mix toward higher-end systems, primarily due to the introduction of new
products, leading to higher average selling prices for filers than in the
previous fiscal year. Net sales also grew as a result of increased multiprotocol
system shipments, the licensing of multiprotocol software to pre-existing
customers and increased service and software subscription revenues due to a
growing installed base.
International net sales (including U.S. exports) were $37.8 million and
$16.1 million, for fiscal 1998 and 1997, respectively. The increase in
international net sales was primarily a result of European sales growth due to
increased headcount in the direct sales force over the prior fiscal year and to
the introduction of the new products in June and July 1997.
There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
Gross Margin -- Gross margin remained relatively flat increasing slightly
to 59.3% of net sales for fiscal 1998 compared to 59.2% of net sales for fiscal
1997. This increase in gross margin was primarily attributable to the increase
in product volume, lower costs of key components, increased manufacturing
efficiencies and by
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the sale of the Company's new product with cost-reduced designs first introduced
in June and July 1997. Gross margin was also favorably impacted by the licensing
of multiprotocol software and by growth in software subscription and service
revenues due to a growing installed base. Factors contributing to gross margin
growth were partially offset by the sale of 4 gigabyte drives at reduced prices
in fiscal 1998.
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition, product configuration, direct versus
indirect sales, the mix and average selling prices of products, new product
introductions and enhancements and the cost of components and manufacturing
labor. In particular, the Company's gross margin varies based upon the
configuration of systems that are sold and whether they are sold directly or
through indirect channels. Highly configured systems typically generate lower
overall gross margin percentages due to greater disk drive and memory content.
Sales and Marketing -- Sales and marketing expenses consist primarily of
salaries, commissions, advertising and promotional expenses and customer service
and support costs. Sales and marketing expenses increased 76.3% to $42.8 million
in fiscal 1998, compared to $24.3 million in fiscal 1997. These expenses were
25.7% and 26.0% of net revenues for fiscal 1998 and 1997, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, including growth in the domestic and
international direct sales forces and increased commission expenses. During the
quarter ended January 23, 1998, the Company launched an advertising campaign
which contributed to absolute dollar growth in sales and marketing expenses for
fiscal 1998. The Company expects to continue to increase its sales and marketing
expenses in an effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels and increase
product and company awareness. The Company believes that its continued growth
and profitability is dependent in part on the successful expansion of its
international operations, and therefore, has committed significant resources to
international sales.
Research and Development -- Research and development expenses consist
primarily of salaries and benefits and prototype expenses. Research and
development expenses increased 85.6% to $16.6 million in fiscal 1998, compared
to $9.0 million in the prior fiscal year. These expenses represented 10.0% and
9.6% of net sales in fiscal 1998 and 1997, respectively, and increased as a
result of headcount growth, prototyping expenses associated with the development
of new products and ongoing support of current and future product development
and enhancement efforts. The Company believes that significant investments in
research and development will be required to remain competitive and expects that
such expenditures will continue to increase in absolute dollars.
General and Administrative -- General and administrative expenses were $6.5
million in fiscal 1998, compared to $4.1 million in fiscal 1997, an increase of
57.9%. These expenses represented 3.9% and 4.4% of net sales for such periods
and increased in absolute dollars primarily as a result of headcount growth,
increased professional services fees and an increase to the allowance for bad
debt. The Company believes that its general and administrative expenses will
increase in absolute dollars as the Company continues to build its
infrastructure.
Litigation Settlement -- See discussion in MD&A section titled "Fiscal 1997
Compared to Fiscal 1996."
Purchased In-Process Technology and Related Compensation Charge -- See
discussion in MD&A section titled "Fiscal 1997 Compared to Fiscal 1996."
Other Income, Net -- Other income, net, was $0.9 million and $1.0 million
in fiscal 1998 and 1997, respectively. Other income, net, decreased over the
corresponding period of the prior year due primarily to foreign currency
exchange losses recorded in fiscal 1998.
Provision for Income Taxes -- The Company's effective tax rate for fiscal
1998 was 37.5% compared to 93.8% for fiscal 1997. The fiscal 1997 tax rate was
primarily affected by the one-time charge to operations of $7.4 million for the
write-off of purchased in-process research and development related to the IMC
acquisition which was not deductible for income tax purposes. Excluding the net
effect of the IMC acquisition, the fiscal 1997 effective tax rate would have
been 35%. The higher effective tax rate in fiscal 1998, compared to the fiscal
1997 effective tax rate, exclusive of the IMC acquisition, relates to increased
earnings, which reduce the impact of research and development and other tax
credits on the effective tax rate. Additionally, fiscal 1997
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included a benefit for the reversal of a valuation allowance previously provided
against deferred tax assets which did not occur in fiscal 1998. As of April 30,
1998 and 1997, a valuation allowance was deemed unnecessary as Company
management determined that it is more likely than not that the net deferred tax
asset is realizable.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales -- Net sales increased by 100% to $93.3 million in fiscal 1997
from $46.6 million in fiscal 1996. This increase was attributable to an
increased shipping volume of filers and related peripheral devices and higher
average selling prices of filers. The increase in filer shipments resulted
primarily from the Company's expansion of its domestic and international direct
sales force, growth of the Company's domestic and international indirect sales
channel, increased market acceptance of the Company's products and the
introduction of the NetApp F540. The higher average selling prices resulted
primarily from the introduction of the enterprise-class NetApp F540 and the
shipment of a greater number of units directly to end users, who generally
purchase more highly configured systems at higher average selling prices than
resellers. Net sales also increased as a result of the introduction of
multiprotocol systems and the licensing of multiprotocol software to
pre-existing customers.
Gross Margin -- Gross margin increased to 59.2% in fiscal 1997 from 55.9%
in fiscal 1996. This increase in gross margin was primarily attributable to the
increase in product volume in fiscal 1997, lower costs of key components and
increased manufacturing efficiencies. Gross margin also increased over the prior
fiscal year as a result of licensing multiprotocol software and increases in
software subscription revenue due to a larger installed base. These factors
offset the effect of increased sales of highly configured systems during fiscal
1997, which generally generate lower gross margins per system due to higher disk
drive content.
Sales and Marketing -- Sales and marketing expenses increased 90.6% to
$24.3 million in fiscal 1997 from $12.7 million in fiscal 1996. These expenses
were 26.0% and 27.3% of net sales in fiscal 1997 and 1996, respectively. The
increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, particularly the increase in the
direct sales force, and increased commission expenses related to higher sales
volumes.
Research and Development -- Research and development expenses increased
88.3% to $9.0 million in fiscal 1997 from $4.8 million in fiscal 1996. These
expenses represented 9.6% and 10.2% of net sales in fiscal 1997 and 1996,
respectively, and increased in absolute dollars primarily as a result of
increased headcount, prototyping expenses associated with the development of new
products and the support of the current and future product development and
enhancement efforts.
General and Administrative -- General and administrative expenses were $4.1
million in fiscal 1997, compared to $2.6 million in fiscal 1996, an increase of
60.4%. These expenses represented 4.4% and 5.5%, respectively, of net sales for
such periods. In fiscal 1997, the Company continued its investments in
additional staffing, facilities expansion and related occupancy costs necessary
to manage and support the Company's growth. Professional fees also increased
from fiscal 1996 to fiscal 1997. The growth in professional fees was primarily
related to increases in general legal fees, investor relation activities and
accounting related services.
Purchased In-Process Technology and Related Compensation Charge -- On March
17, 1997, the Company acquired all outstanding shares and options to purchase
shares of IMC common stock by issuing 374,046 shares of the Company's common
stock and options to purchase shares of the Company's common stock. In
connection with the acquisition, intangible assets of $8.4 million were
acquired, of which $7.4 million was reflected as a one-time charge to operations
for the write-off of in-process research and development that had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use. The remaining intangible assets of $1.0 million,
consisting of existing technology and goodwill, are included in other assets in
the accompanying consolidated balance sheets and are being amortized over their
estimated useful lives of five years.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the
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Company's common stock immediately preceding the acquisition. In connection with
the granting of these options, the Company recorded a compensation charge of
$3.2 million in the fourth quarter of fiscal 1997.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. IMC results of
operations included in the Company's consolidated financial statements for
fiscal 1997 were not significant. See Note 4 of Notes to Consolidated Financial
Statements for pro forma financial information.
Litigation Settlement -- In July 1994, the Company and certain of its
former employees were named as defendants in a lawsuit which alleged that one of
the Company's founders, who left the Company in March 1995, misappropriated
confidential information prior to the Company's founding in April 1992. In
August 1996, the Company entered into a settlement with the plaintiff which
resulted in a charge to earnings of $4.3 million in the first quarter of fiscal
1997, which included a $3.5 million payment to the plaintiffs and $0.8 million
of legal fees. As the payment released the Company from all liabilities
associated with the case, the Company has no future obligations to the
plaintiffs. The Company denies any wrongdoing on its part or on the part of the
founder.
Other Income, Net -- Other income, net, was $1.0 million and $0.6 million
in fiscal 1997 and 1996, respectively. In both of these periods, other income,
net, represented less than 2% of net sales. Other income, net, increased in
fiscal 1997 due primarily to interest income earned over four quarters of fiscal
1997 on the net proceeds of $25.7 million from the Company's November 1995
initial public offering ("IPO") compared to interest earnings on IPO proceeds
over two quarters for fiscal 1996.
Provision for Income Taxes -- The fiscal 1997 income tax provision was $3.8
million (effective rate of 93.8%). The fiscal 1997 tax rate was primarily
affected by the one-time charge to operations of $7.4 million for the write-off
of purchased in-process research and development related to the IMC acquisition
which was not deductible for income tax purposes. Excluding the net effect of
the IMC acquisition, the effective tax rate would have been 35%. As of April 30,
1997, a valuation allowance was deemed unnecessary as Company management
determined that it is more likely than not that the net deferred tax asset is
realizable.
In fiscal 1996, the Company's federal and state income tax liabilities were
offset by the realization of a portion of its net deferred tax assets. The
Company recognized a benefit for its net deferred tax assets to the extent that
they were recoverable through tax refunds in the event of future net operating
losses. The Company recorded a valuation allowance for the balance of its net
deferred tax assets as a result of uncertainty regarding realization of the
assets, including the limited operating history of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1998, compared to the April 30, 1997 balances, the
Company's cash, cash equivalents and short-term investments increased by $19.7
million to $48.1 million. Working capital increased by $27.7 million to $69.6
million, impacted primarily by increases in accounts receivable, cash and cash
equivalents and short-term investments, partially offset by increases in
accounts payable, deferred revenue, accrued compensation and benefits and other
accrued liabilities. The Company generated cash from operating activities
totaling $22.7 million and $6.3 million in fiscal 1998 and fiscal 1997,
respectively. Net cash provided by operating activities in fiscal 1998
principally related to net income of $21.0 million, depreciation and
amortization which are non-cash expenses and increases in current liabilities,
partially offset by increases in accounts receivable, prepaid expenses and other
and deferred income taxes.
The Company used $8.0 million and $7.1 million of cash during fiscal 1998
and 1997, respectively, to purchase property and equipment. In addition, the
Company used $3.9 million in both fiscal 1998 and fiscal 1997 for net short-term
investment purchases. Financing activities provided $6.9 million and $1.7
million during fiscal 1998 and 1997, respectively. The increase in cash provided
by financing activities in fiscal 1998 compared to the prior fiscal year was due
to an increased quantity of stock options exercised at a higher average exercise
price.
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid
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$5.0 million of the $33.8 million purchase price as a nonrefundable deposit. The
agreement allows the Company to assign its rights and obligations to a
third-party entity should the Company decide to enter into an operating lease.
It is the Company's intent to assign its rights and obligations to a third-party
entity and enter into an operating lease, provided the Company can obtain
satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3.1 million, commencing in October 1999, for a 6.2 acre plot
in Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4.5 million
nonrefundable deposit. The option allows the Company to purchase the land,
within a 90-day period, commencing in December 1999 at a purchase price of $23.7
million and its rights and obligations under this agreement may be assigned to
third parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5.0 million unsecured revolving
credit facility with a domestic commercial bank. Under terms of the credit
facility which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
Excluding the commitments related to the aforementioned properties which
the Company intends to assign to a third party and then establish operating
leases, the Company currently has no significant commitments other than
commitments under operating leases. The Company believes that its existing
liquidity and capital resources, including the $5.0 million line of credit, are
sufficient to fund its operations for at least the next twelve months.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers to computer programs which use two digits
rather than four to define a given year and which therefore might read a date
using "00" as the year 1900 rather than the year 2000. The Company is currently
assessing the impact the Year 2000 Issue will have on its internal information
systems. The Company believes that the majority of its current products are Year
2000 compliant and that new products are being designed to the Year 2000
compliant. The Company is currently performing extended testing. The Company
does not anticipate that addressing the Year 2000 Issue for its internal
information systems and current and future products will have a material adverse
impact on its operations, financial results or cash flows. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
could occur. The Year 2000 Issue could lower demand for the Company's products
while increasing the Company's costs. These combining factors, while not
quantified, could have a material adverse impact on the Company's business,
operating results, financial condition and cash flows.
The Company has key relationships with certain suppliers. If these
suppliers fail to adequately address the Year 2000 Issue for the products they
provide the Company, this could have a material adverse impact on the Company's
business, operating results, financial condition or cash flows. The Company is
still assessing the effect the Year 2000 Issue will have on its suppliers and,
at this time, cannot determine the impact it will have.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
statements of financial accounting standards ("SFAS"). SFAS No. 130, "Reporting
Comprehensive Income", requires that an enterprise report, by major components
and as a single total, the change in its net assets from nonowner sources during
the period. SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company has not yet
identified its SFAS No. 131 reporting segments. Adoption of these statements
will not impact the
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Company's consolidated financial position, results of operations or cash flows.
Both statements are effective for the Company's fiscal year 1999.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Network Appliance, Inc.:
We have audited the accompanying consolidated balance sheets of Network
Appliance, Inc. and its subsidiaries as of April 30, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity (deficit) and
cash flows for each of the three years in the period ended April 30, 1998. Our
audits also included the financial statement schedule listed in Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Network
Appliance, Inc. and its subsidiaries as of April 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 8, 1998 (July 17, 1998 as to Note 11)
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NETWORK APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
APRIL 30,
-------------------
1998 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 37,315 $21,520
Short-term investments.................................... 10,800 6,916
Accounts receivable, net of allowances of $811 in 1998 and
$330 in 1997........................................... 34,313 13,911
Inventories............................................... 8,707 9,920
Prepaid expenses and other................................ 2,524 1,253
Deferred taxes............................................ 5,280 3,100
-------- -------
Total current assets.............................. 98,939 56,620
-------- -------
PROPERTY AND EQUIPMENT, NET................................. 12,217 9,238
OTHER ASSETS................................................ 4,580 3,083
-------- -------
$115,736 $68,941
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.................. $ 17 $ 21
Accounts payable.......................................... 10,024 4,394
Income taxes payable...................................... 1,782 1,023
Accrued compensation and related benefits................. 8,485 4,666
Other accrued liabilities................................. 4,201 2,280
Deferred revenue.......................................... 4,799 2,317
-------- -------
Total current liabilities......................... 29,308 14,701
-------- -------
LONG-TERM OBLIGATIONS....................................... 163 211
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 5,000 shares authorized;
shares outstanding: none in 1998 and 1997.............. -- --
Common stock, no par value; 110,000 shares authorized;
shares outstanding: 33,648 in 1998 and 32,832 in
1997................................................... 66,422 54,707
Deferred stock compensation............................... (498) (54)
Retained earnings (accumulated deficit)................... 20,341 (624)
-------- -------
Total shareholders' equity........................ 86,265 54,029
-------- -------
$115,736 $68,941
======== =======
</TABLE>
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1998 1997 1996
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<S> <C> <C> <C>
NET SALES................................................... $166,163 $93,333 $46,632
COST OF SALES............................................... 67,549 38,061 20,557
-------- ------- -------
Gross margin...................................... 98,614 55,272 26,075
-------- ------- -------
OPERATING EXPENSES:
Sales and marketing....................................... 42,779 24,268 12,735
Research and development.................................. 16,649 8,968 4,762
General and administrative................................ 6,528 4,134 2,578
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Litigation settlement..................................... -- 4,300 --
-------- ------- -------
Total operating expenses.......................... 65,956 52,189 20,075
-------- ------- -------
INCOME FROM OPERATIONS...................................... 32,658 3,083 6,000
OTHER INCOME (EXPENSE):
Interest income........................................... 1,097 1,048 668
Interest and other expense................................ (208) (88) (68)
-------- ------- -------
Total other income................................ 889 960 600
-------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 33,547 4,043 6,600
PROVISION FOR INCOME TAXES.................................. 12,582 3,793 --
-------- ------- -------
NET INCOME.................................................. $ 20,965 $ 250 $ 6,600
======== ======= =======
NET INCOME PER SHARE:
Basic..................................................... $ 0.65 $ 0.01 $ 0.37
======== ======= =======
Diluted................................................... $ 0.58 $ 0.01 $ 0.21
======== ======= =======
SHARES USED IN PER SHARE CALCULATION:
Basic..................................................... 32,457 30,489 17,997
======== ======= =======
Diluted................................................... 35,951 34,402 31,468
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
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NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE RETAINED
PREFERRED STOCK COMMON STOCK DEFERRED EARNINGS
---------------- ---------------- STOCK (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT) TOTAL
------ ------- ------ ------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 30, 1995...... 2,374 $ 1,340 10,132 $ 211 -- $(7,474) $(5,923)
Exercise of stock options..... -- -- 2,875 274 -- -- 274
Exercise of warrants.......... -- -- 719 708 -- -- 708
Issuance of common stock in
connection with the
Company's initial public
offering.................... -- -- 4,310 25,714 -- -- 25,714
Repurchase of common stock.... -- -- (429) (68) -- -- (68)
Conversion of Series A
preferred stock into common
stock....................... (2,374) (1,340) 2,374 1,340 -- -- --
Conversion of Series B and C
preferred stock into common
stock....................... -- -- 12,299 11,354 -- -- 11,354
Deferred stock compensation... -- -- -- 515 (515) -- --
Amortization of deferred stock
compensation................ -- -- -- -- 132 -- 132
Income tax benefit from
employee stock
transactions................ -- -- -- 238 -- -- 238
Net income.................... -- -- -- -- -- 6,600 6,600
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1996...... -- -- 32,280 40,286 (383) (874) 39,029
Issuance of common stock...... -- -- 583 1,730 -- -- 1,730
Repurchase of common stock.... -- -- (376) (52) -- -- (52)
Amortization of deferred stock
compensation................ -- -- -- -- 85 -- 85
Reversal of deferred stock
compensation due to employee
termination................. -- -- -- (244) 244 -- --
Income tax benefit from
employee stock
transactions................ -- -- -- 2,487 -- -- 2,487
Common stock issued for IMC
acquisition................. -- -- 345 7,350 -- -- 7,350
Compensation charge for IMC
acquisition................. -- -- -- 3,150 -- -- 3,150
Net income.................... -- -- -- -- -- 250 250
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1997...... -- -- 32,832 54,707 (54) (624) 54,029
Issuance of common stock...... -- -- 827 6,937 -- -- 6,937
Repurchase of common stock.... -- -- (11) (1) -- -- (1)
Deferred stock compensation... -- -- -- 714 (714) -- --
Amortization of deferred stock
compensation................ -- -- -- -- 270 -- 270
Income tax benefit from
employee stock
transactions................ -- -- -- 4,065 -- -- 4,065
Net income.................... -- -- -- -- -- 20,965 20,965
------ ------- ------ ------- ----- ------- -------
BALANCES, APRIL 30, 1998...... -- -- 33,648 $66,422 $(498) $20,341 $86,265
====== ======= ====== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 11
NETWORK APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 20,965 $ 250 $ 6,600
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 5,548 2,866 1,386
Purchased in-process technology and related compensation
charge................................................. -- 10,519 --
Provision for doubtful accounts........................... 481 -- 110
Deferred income taxes..................................... (1,749) (2,794) (2,100)
Deferred rent............................................. (36) (69) 87
Changes in assets and liabilities:
Accounts receivable.................................... (20,883) (8,573) (2,270)
Inventories............................................ 1,213 (5,095) (1,181)
Prepaid expenses and other............................. (1,484) (1,031) (525)
Accounts payable....................................... 5,626 2,295 (1,415)
Accrued compensation and related benefits.............. 3,819 2,636 1,065
Income taxes payable................................... 4,823 3,010 500
Other accrued liabilities.............................. 1,921 338 876
Deferred revenue....................................... 2,482 1,917 370
-------- -------- -------
Net cash provided by operating activities......... 22,726 6,269 3,503
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,971) (7,124) (4,281)
Redemptions of short-term investments..................... 11,166 13,836 --
Purchases of short-term investments....................... (15,050) (17,770) (2,982)
Other assets.............................................. (2,000) -- --
Cash acquired from IMC purchase........................... -- 11 --
-------- -------- -------
Net cash used in investing activities............. (13,855) (11,047) (7,263)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 1,250
Repayments of long-term obligations....................... (12) (17) (1,272)
Payments for repurchase of common stock................... (1) (52) (68)
Proceeds from sale of common stock, net................... 6,937 1,730 26,696
-------- -------- -------
Net cash provided by financing activities......... 6,924 1,661 26,606
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 15,795 (3,117) 22,846
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 21,520 24,637 1,791
-------- -------- -------
End of year............................................... $ 37,315 $ 21,520 $24,637
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 12
NETWORK APPLIANCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA)
1. THE COMPANY
Network Appliance, Inc., incorporated in the state of California in April
1992, and its subsidiaries (the "Company") operate in a single industry segment
and are involved in the design, manufacturing, marketing and support of high
performance network data storage devices which provide fast, simple, reliable
and cost-effective file service for data-intensive network environments.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- Although the Company operates on a 52-week or 53-week year
ending on the last Friday in April, for presentation purposes the Company has
indicated in the accompanying consolidated financial statements that its fiscal
year end is April 30. Fiscal 1998, 1997 and 1996 were 52-week years. Fiscal 1999
will be a 53-week fiscal year.
Basis of Presentation -- The consolidated financial statements include the
Company and its wholly-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation. Certain amounts from prior years
have been reclassified to conform to current-year presentation. These
reclassifications did not change previously reported total assets, liabilities,
shareholders' equity or net income.
Cash and Cash Equivalents -- The Company considers all highly liquid debt
investments with original maturities of three months or less to be cash
equivalents.
Short-term Investments -- The Company's short-term investments consist of
securities with original maturities ranging between three and six months. All of
the Company's investments are classified as available-for-sale, and are stated
at amortized cost, which approximates fair market value. Short-term investments
consist of $10,800 and $6,916 of municipal securities as of April 30, 1998, and
April 30, 1997, respectively. No short-term investments were sold during any of
the periods presented.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Purchased components....................................... $4,494 $6,775
Work in process............................................ 1,889 1,524
Finished goods............................................. 2,324 1,621
------ ------
$8,707 $9,920
====== ======
</TABLE>
Property and Equipment -- Property and equipment is stated at cost and is
depreciated on a straight-line basis over estimated useful lives which range
from two to five years. Leasehold improvements are amortized over their
estimated useful lives or the life of the lease, whichever is shorter. Property
and equipment consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Computers, related equipment and purchased software...... $16,979 $11,011
Furniture and fixtures................................... 1,962 1,221
Leasehold improvements................................... 2,782 1,520
------- -------
21,723 13,752
Accumulated depreciation and amortization................ (9,506) (4,514)
------- -------
$12,217 $ 9,238
======= =======
</TABLE>
11
<PAGE> 13
Revenue Recognition -- The Company recognizes revenue and records estimated
product return and warranty reserves upon shipment if no material obligations
remain outstanding and the collectibility of receivables is deemed to be
probable. Service and software subscription revenues are recognized over the
terms of the related contractual periods. Combined service and software
subscription revenues were less than 10% of net sales for all of the periods
presented.
Advertising Costs -- Advertising costs are charged to operations when
incurred. Advertising expenses for fiscal 1998, 1997 and 1996 were aproximately
$1,000, $100 and $25, respectively.
Software Development Costs -- The Company capitalizes eligible computer
software development costs, which include software enhancement costs, upon the
establishment of technological feasibility, which occurs upon the completion of
a working model. Software development costs capitalized have not been
significant.
Foreign Currency Translation -- The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of the year,
nonmonetary assets and liabilities are translated at historical rates and net
sales and expenses are translated at average exchange rates in effect during the
period. Transaction gains and losses, which are included in other income
(expense) in the accompanying consolidated statements of income, have not been
significant.
Certain Significant Risks and Uncertainties -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for doubtful accounts receivable, inventory reserves, various accruals
and warranty reserves. Actual results could differ from those estimates.
The Company is subject to certain risks, including without limitation risks
relating to history of operating losses, fluctuating operating results, customer
and market acceptance of new products, dependence on new products, rapid
technological change, litigation, dependence on growth in the network file
server market, expansion of international operations, product concentration,
changing product mix, competition, recent management additions, management of
expanding operations, dependence on high-quality components, dependence on
proprietary technology, intellectual property rights, dependence on key
personnel, volatility of stock price, shares eligible for future sale, effect of
certain anti-takeover provisions and dilution and the Year 2000 Issue.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments and accounts receivable. Cash, cash
equivalents and short-term investments consist primarily of municipal
securities, cash accounts held at various banks and a money market fund held at
a single financial institution. The Company sells its products primarily to
large organizations in different industries and geographies. Credit risk is
further mitigated by the Company's credit evaluation process and limited payment
terms. The Company does not require collateral or other security to support
accounts receivable. The Company maintains an allowance for potential credit
losses.
Net Income Per Share -- The Company has adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
effective in the third quarter of fiscal 1998. SFAS 128 requires the
presentation of basic and diluted net income per share. Basic net income per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for that period. Diluted
net income per share is computed giving effect to all dilutive potential shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental common shares subject to repurchase, common shares
issuable upon exercise of stock options and warrants and convertible preferred
stock. All prior-period net income (loss) per-share amounts have been restated
to comply with SFAS 128 as well as the two-for-one stock split (See Note 5).
12
<PAGE> 14
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
NET INCOME (NUMERATOR):
Net Income, basic and diluted....................... $20,965 $ 250 $ 6,600
======= ======= =======
SHARES (DENOMINATOR):
Weighted average common shares outstanding.......... 33,200 32,329 20,948
Weighted average common shares outstanding subject
to repurchase.................................... (743) (1,840) (2,951)
------- ------- -------
Shares used in basic computation.................... 32,457 30,489 17,997
Weighted average common shares outstanding subject
to repurchase.................................... 743 1,840 2,951
Common shares issuable upon exercise of stock
options and warrants............................. 2,751 2,073 2,269
Convertible preferred stock......................... -- -- 8,251
------- ------- -------
Shares used in diluted computation.................. 35,951 34,402 31,468
======= ======= =======
NET INCOME PER SHARE:
Basic............................................... $ 0.65 $ 0.01 $ 0.37
======= ======= =======
Diluted............................................. $ 0.58 $ 0.01 $ 0.21
======= ======= =======
</TABLE>
Statements of Cash Flows -- Supplemental cash flow and noncash investing
and financing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid......................................... $ -- $ -- $ 60
Income taxes paid..................................... 9,402 3,809 1,362
NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred stock compensation........................... 714 (244) 515
Conversion of preferred stock into common stock....... -- -- 12,694
Income tax benefit from employee stock transactions... 4,065 2,487 238
Common stock issued for IMC acquisition............... -- 7,350 --
Deferred stock compensation charge for IMC
acquisition........................................ -- 3,150 --
</TABLE>
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."
Accounting for Long-Lived Assets -- Effective May 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires the Company to review the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to those
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 had no
impact on the Company's financial condition or results of operations.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board issued two new statements of financial accounting
standards ("SFAS"). SFAS No. 130, "Reporting Comprehensive Income", requires
that an enterprise report, by major components and as a single total, the change
in its net assets from nonowner sources during the period. SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and change in its net assets from nonowner sources during the period. SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information",
establishes annual and interim reporting standards for major customers. The
Company has not yet identified its SFAS No. 131 reporting segments. Adoption of
these statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for the
Company's fiscal year 1999.
13
<PAGE> 15
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition".
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP No. 97-2 is
effective for transactions entered into during the Company's fiscal year 1999
and thereafter. The Company does not expect that the adoption of this statement
will materially impact the Company's financial position, results of operations
or cash flows.
3. COMMITMENTS
The Company leases its main facility under operating leases that expire
through fiscal 2003. Sales offices of the Company are also leased under
operating leases which expire through fiscal 2013. The Company is responsible
for certain maintenance costs, taxes and insurance under the leases. Future
minimum annual lease payments as of April 30, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
----------------------
<S> <C>
1999............................................. $ 4,249
2000............................................. 3,323
2001............................................. 1,049
2002............................................. 886
2003............................................. 707
Thereafter....................................... 2,185
-------
Total lease payments............................... $12,399
=======
</TABLE>
Rent expense was $4,278, $1,195 and $755 for the years ended April 30,
1998, 1997 and 1996, respectively. Rent expense under certain Company facility
leases is recognized on a straight-line basis over the term of the lease. The
difference between the amounts paid and the amounts expensed is classified as
long-term obligations in the accompanying consolidated balance sheets.
The total of minimum rental payments to be received through 1999 under
non-cancelable subleases is $1,268 as of April 30, 1998.
4. ACQUISITION
On March 17, 1997, the Company acquired all outstanding shares and options
to purchase shares of IMC common stock by issuing 374 shares of the Company's
common stock and options to purchase shares of the Company's common stock. The
purchase price related to the common stock and options to purchase shares of the
Company's common stock was $7,350. IMC was founded in 1996 to develop and
commercialize Internet/intranet proxy caching software.
Certain key employees of IMC who continued as employees of the Company were
also granted vested options to purchase shares of the Company's common stock at
a discount to the market price of the Company's common stock immediately
preceding the acquisition. In connection with the granting of discounted options
to purchase shares of the Company's common stock, the Company recorded a
compensation expense of $3,150 in the fourth quarter of fiscal 1997. The Company
also recorded a deferred income tax benefit of $1,304, primarily related to the
compensation charge.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of IMC from the date of acquisition forward have been
included in the Company's consolidated financial statements. In connection with
the acquisition, intangible assets of $8,362 were acquired, of which $7,369 was
reflected as a one-time charge to operations for the write-off of purchased
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The $10,519 combined one-time charge for purchased in-process technology
and compensation expense has been reflected in the Company's fiscal 1997
consolidated statement of income within operating expenses. The remaining
intangible assets of $993, consisting of existing technology and goodwill, are
included in other assets
14
<PAGE> 16
in the accompanying consolidated balance sheets and are being amortized over
their estimated useful lives of five years.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 21
Property and equipment, net................................. 46
Intangible assets, including purchased in-process
technology................................................ 8,362
Current liabilities assumed................................. (1,079)
-------
Net assets acquired......................................... $ 7,350
=======
</TABLE>
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended April 30, 1997 as if the IMC
acquisition had occurred at the beginning of each period presented and at the
purchase price established in March 1997. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for fiscal 1997
combine the Company's results of operations for the fiscal year ended April 30,
1997 with the results of IMC for the period from inception (May 6, 1996) through
the date of acquisition and include the $10,519 charge for purchased in-process
technology and the related compensation charge, as well as the related tax
benefits, and the straight-line amortization of intangible assets over a period
of five years. The pro forma results for fiscal 1996 reflect the Company's
actual results of operations for that year less the amortization of intangible
assets related to the acquisition:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Net Sales.............................................. $93,552 $46,632
Net Income (Loss)...................................... (390) 6,401
Net Income (Loss) per Share, Basic..................... (0.01) 0.35
Net Income (Loss) per Share, Diluted................... (0.01) 0.20
</TABLE>
5. SHAREHOLDERS' EQUITY
Initial Public Offering -- In November 1995, the Company completed its
initial public offering of 4,310 shares of its common stock. Net proceeds from
the offering were $25,714. In conjunction with the offering, all outstanding
shares of preferred stock automatically converted into common stock. In
addition, the Company issued 362 shares of common stock upon the exercise of
Series A preferred warrants, and 357 shares of common stock upon the exercise of
Series C preferred warrants. The Company received total proceeds of $708 from
the exercise of these warrants.
Preferred Stock -- The Company's Board of Directors has the authority to
issue up to 5,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders.
Stock Split -- On November 11, 1997, the Board of Directors approved a
two-for-one stock split of the Company's common stock which was effective
December 18, 1997. Share and per share data for all periods presented herein
have been adjusted to give effect to the split.
Stock Option Plans -- The Company adopted the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan") in April 1993. In September 1995, the Company
adopted the 1995 Stock Incentive Plan (the "1995 Plan"). The 1995 Plan replaced
the 1993 Plan, and provides for the grant of options and the issuance of common
stock under terms substantially the same as those provided under the 1993 Plan,
except that the 1995 Plan does not allow for the exercise of options prior to
vesting. Accordingly, all options and shares issued under the 1993 Plan were
incorporated into the 1995 Plan upon the effectiveness of the Company's initial
public offering.
15
<PAGE> 17
Under the 1995 Plan, the Board of Directors may grant to employees,
directors and consultants options to purchase shares of the Company's common
stock. The exercise price for an incentive stock option and a nonqualified stock
option cannot be less than 100% and 85%, respectively, of the fair market value
of the Company's common stock as determined by the Board of Directors on the
date of grant. Options granted under the 1995 Plan generally vest at a rate of
25% on the first anniversary of the vesting commencement date and then ratably
over the following 36 months. Options expire as determined by the Board of
Directors, but not more than ten years after the date of grant.
In April 1997, the Board of Directors adopted the Special Non-Officer Stock
Option Plan (the "Non-Officer Plan")which provides for the grant of options and
the issuance of common stock under terms substantially the same as those
provided under the 1995 Plan, except that the Non-Officer Plan allows only for
the issuance of nonqualified options to non-officer employees. A summary of the
combined activity under the Company's stock option plans and agreements is as
follows:
<TABLE>
<CAPTION>
SHARES OUTSTANDING OPTIONS
AVAILABLE ---------------------
FOR NUMBER WEIGHTED
GRANT OF SHARES AVERAGE
--------- --------- --------
<S> <C> <C> <C>
Balances, April 30, 1995.............................. 336 2,777 $ 0.07
Shares reserved for plan............................ 6,500 -- --
Options granted (weighted average fair value of
$1.60)........................................... (3,586) 3,586 4.23
Options exercised................................... -- (2,875) 0.11
Options canceled.................................... 295 (295) 1.01
------ ------
Balances, April 30, 1996 (196 options exercisable).... 3,545 3,193 4.63
Shares reserved for IMC acquisition................. 258 -- --
Options granted (weighted average fair value of
$6.59)........................................... (3,338) 3,338 14.84
Options exercised................................... -- (418) 1.65
Options canceled.................................... 474 (474) 5.35
------ ------
Balances, April 30, 1997 (1,997 options
exercisable)........................................ 939 5,639 10.83
Shares reserved for plan............................ 4,000 -- --
Options granted (weighted average fair value of
$9.12)........................................... (2,724) 2,724 23.51
Options exercised................................... -- (620) 8.46
Options canceled.................................... 574 (574) 13.81
------ ------
Balances, April 30, 1998 (2,506 options
exercisable)........................................ 2,789 7,169 $15.58
====== ======
</TABLE>
Options for the purchase of 1,873 shares of common stock were vested as of
April 30, 1998. Unvested common shares issued under the 1993 Plan of 310 as of
April 30, 1998 are subject to repurchase by the Company.
16
<PAGE> 18
Additional information regarding options outstanding as of April 30, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES APRIL 30, 1998 (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.05 - $ 0.07 181 6.15 $ 0.06 181 $ 0.06
0.10 - 0.14 127 6.95 0.13 111 0.13
1.00 - 1.50 181 7.38 1.33 162 1.32
2.25 - 3.00 115 7.32 2.64 115 2.64
3.60 - 4.05 674 7.46 3.83 674 3.83
5.50 - 5.90 410 8.17 5.68 258 5.55
10.88 - 15.75 2,303 8.58 13.90 715 13.57
17.00 - 25.38 2,183 9.02 20.42 290 18.95
25.63 - 33.58 995 9.69 29.78 -- 0.00
----- -----
$ 0.05 - $33.58 7,169 8.60 $15.58 2,506 $ 7.88
===== =====
</TABLE>
Employee Stock Purchase Plan -- Under the Employee Stock Purchase Plan,
employees are entitled to purchase shares of the Company's common stock at 85%
of the fair market value at certain specified dates. Of the 700 shares
authorized to be issued under this plan, 335 shares were available for issuance
at April 30, 1998 and 201 and 164 shares were issued in fiscal 1998 and 1997,
respectively, at a weighted average price of $8.41 and $6.33, respectively.
Pro Forma Information -- As discussed in Note 2, the Company continues to
account for its stock-based awards using the intrinsic value method in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees" and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements with the exception of $270, $85 and $132 in fiscal 1998, 1997 and
1996, respectively, which consists of the amortization of deferred stock
compensation related to the granting of nonqualified stock options at exercise
prices below market.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and net income per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected life (in years).................................... 2.94 2.90 3.01
Risk-free interest rate..................................... 6.00% 6.06% 5.89%
Volatility.................................................. 50% 50% 50%
Expected dividend........................................... -- -- --
</TABLE>
17
<PAGE> 19
The Company's calculations are based on a multiple option valuation
approach and forfeitures are recognized as they occur. If the computed fair
values of the fiscal 1998, 1997 and 1996 awards had been amortized to expense
over the vesting period of the awards, pro forma net income (loss) and net
income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Net income (loss)....................................... $8,677 $(4,661) $5,824
Net income (loss) per share, basic...................... 0.27 (0.15) 0.32
Net income (loss) per share, diluted.................... 0.24 (0.15) 0.19
</TABLE>
However, the impact of outstanding non-vested stock options granted prior
to fiscal 1996 has been excluded from the pro forma calculations; accordingly,
the fiscal 1998, 1997 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
Deferred Stock Compensation -- In May 1995, the Company issued stock
options for the purchase of 1,063 shares of common stock at $0.14 per share. The
Company recognized $515 of deferred compensation in May 1995 equal to the
difference between the option price as determined by the Board of Directors and
$0.63 (the deemed fair value for financial reporting purposes) for each option.
The Company is amortizing the deferred compensation expense ratably over the
four-year period in which the options vest.
In fiscal 1998, the Company recorded $714 of deferred compensation,
primarily related to the grant of stock options to certain highly compensated
employees. Under terms of the 1995 Stock Option Plan, highly compensated
employees as defined by Company's management are eligible to contribute between
$15 to $75 in annual salary for the rights to be granted nonqualified stock
options. The discount from fair market value which is equal to the amount of
salary contributed has been recorded as deferred compensation expense. The
Company is amortizing the deferred compensation expense ratably over a one-year
period.
6. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) tax-deferred savings plan ("Savings
Plan"). Employees meeting the eligibility requirements, as defined, may
contribute specified percentages of their salaries. The Company contributed $202
and $119 for fiscal 1998 and 1997, respectively. The Company did not make any
contributions to the Savings Plan in fiscal 1996.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal............................................. $12,132 $ 5,062 $ 1,880
State............................................... 2,199 1,525 220
------- ------- -------
Total current....................................... 14,331 6,587 2,100
------- ------- -------
DEFERRED:
Federal............................................. (1,597) (2,394) (1,880)
State............................................... (152) (400) (220)
------- ------- -------
Total deferred...................................... (1,749) (2,794) (2,100)
------- ------- -------
Provision for income taxes.................. $12,582 $ 3,793 $ --
======= ======= =======
</TABLE>
Deferred income taxes result from differences in the timing of certain
expense items for tax and financial reporting purposes.
18
<PAGE> 20
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Tax computed at federal statutory rate................. $11,741 $1,415 $ 2,310
State income taxes, net of federal benefit............. 1,482 764 405
Non-deductible acquisition charges related to the IMC
acquisition.......................................... -- 2,904 --
Research and experimentation credit.................... (555) (410) (50)
Investment tax credit.................................. -- -- (150)
Benefit of foreign sales corporation................... (489) (105) --
Tax exempt interest.................................... (281) (184) --
Change in valuation allowance.......................... -- (673) (2,510)
Business meal exclusion................................ 100 45 --
Other.................................................. 584 37 (5)
------- ------ -------
Provision for income taxes............................. $12,582 $3,793 $ --
======= ====== =======
</TABLE>
The income tax benefits associated with dispositions from employee stock
transactions reduced taxes currently payable by $4,291, $2,487 and $238,
respectively, for fiscal 1998, 1997 and 1996.
Income before income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Domestic................................................ $33,175 $3,983 $6,580
Foreign................................................. 372 60 20
------- ------ ------
Total......................................... $33,547 $4,043 $6,600
======= ====== ======
</TABLE>
Current net deferred tax assets are $5,280 and $3,100, as of April 30, 1998
and April 30, 1997, respectively. Non-current net deferred tax assets at April
30, 1998 and 1997 of $1,363 and $1,794, respectively, are included in other
assets within the accompanying consolidated balance sheets. The components of
the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Reserves and accruals not currently deductible for tax
purposes............................................... $4,599 $2,662
Tax benefit of options issued in IMC acquisition.......... 1,074 1,304
Net operating loss carryforwards.......................... 236 116
Depreciation.............................................. 197 369
Deferred rent............................................. 66 80
Capitalized research and development costs................ -- 142
Other..................................................... 471 221
------ ------
Deferred tax assets............................... $6,643 $4,894
====== ======
</TABLE>
As of April 30, 1998, the Company had federal net operating loss
carryforwards of approximately $674 available to offset future taxable income.
These carryforwards expire in fiscal 2010.
8. OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
The Company operates primarily in one industry segment: the design,
manufacturing and marketing of high-performance network data storage devices.
19
<PAGE> 21
The Company's European operations primarily consist of sales by its
subsidiaries in the United Kingdom, France, Germany and Italy to either
unaffiliated European customers or to independent distributors.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------
1998 1997
--------- --------
<S> <C> <C>
NET SALES:
North America............................................... $138,379 $83,342
Europe...................................................... 27,784 9,991
-------- -------
Total net sales................................... $166,163 $93,333
======== =======
OPERATING INCOME:
North America............................................... $ 32,285 $ 3,023
Europe...................................................... 373 60
-------- -------
Total operating income............................ $ 32,658 $ 3,083
======== =======
IDENTIFIABLE ASSETS:
North America............................................... $105,601 $66,019
Europe...................................................... 10,135 2,922
-------- -------
Total assets...................................... $115,736 $68,941
======== =======
</TABLE>
North America revenues include export sales to Asia which amounted to less
than 10% of total net sales for all periods presented. Sales, operating income
and identifiable assets of the Company's foreign operations were less than 10%
of the comparable amounts on a consolidated basis in fiscal 1996.
No customer accounted for 10% or more of net sales in fiscal 1998, 1997 or
in fiscal 1996.
9. LITIGATION
The computer industry is characterized by frequent litigation regarding
intellectual property rights. During fiscal 1995 a lawsuit of this nature was
filed against the Company and two of its shareholders (the "Whipsaw
Litigation"). During the first quarter of fiscal 1997, the Company settled the
Whipsaw litigation and recorded a pre-tax expense of $4,300 ($3,500 in payments
to the plaintiffs and $800 in legal fees). In connection with the settlement,
the Whipsaw group released the Company from all liabilities.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1998
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................... $33,420 $38,401 $43,984 $50,358
Gross margin................................ 19,850 22,655 26,104 30,005
Net income.................................. 4,221 4,885 5,555 6,304
Net income per share, basic................. 0.13 0.15 0.17 0.19
Net income per share, diluted............... 0.12 0.14 0.15 0.17
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997
----------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................... $18,460 $21,048 $24,845 $28,980
Gross margin................................ 10,867 12,466 14,729 17,210
Net income (loss)(1)........................ (491) 2,780 3,380 (5,419)
Net income (loss) per share, basic(1)....... (0.02) 0.09 0.11 (0.17)
Net income (loss) per share, diluted(1)..... (0.02) 0.08 0.10 (0.17)
</TABLE>
- ---------------
(1) The first quarter of fiscal 1997 includes the Whipsaw Litigation of $2,795
(net of taxes). See Note 9. The fourth quarter of fiscal 1997 includes the
purchased in-process technology and compensation charge related to the IMC
acquisition of $9,215 (net of taxes). See Note 4.
20
<PAGE> 22
11. SUBSEQUENT EVENTS
In June 1998, the Company executed an agreement to acquire 5.9 acres of
land in Sunnyvale, California and the accompanying 127,000 square foot building.
Under terms of the agreement, the Company paid $5,000 of the $33,750 purchase
price as a nonrefundable deposit. The agreement allows the Company to assign its
rights and obligations to a third-party entity should the Company decide to
enter into an operating lease. It is the Company's intent to assign its rights
and obligations to a third-party entity and enter into an operating lease,
provided the Company can obtain satisfactory leasing terms.
In June 1998, the Company signed a 25-year operating lease requiring annual
lease payments of $3,084, commencing in October 1999, for a 6.2 acre plot in
Sunnyvale, California. In connection with executing the operating lease
agreement, the Company also signed an option agreement to purchase the 6.2 acres
of land. Under terms of the option agreement, the Company paid a $4,500
nonrefundable deposit. The option allows the Company to purchase the land,
within a 90-day period, commencing in December 1999 at a purchase price of
$23,745 and its rights and obligations under this agreement may be assigned to
third parties. It is the Company's intent to assign its purchase option to a
third-party entity and to enter into an operating lease with the third-party
entity, provided the Company can obtain satisfactory leasing terms.
In July 1998, the Company negotiated a $5,000 unsecured revolving credit
facility with a domestic commercial bank. Under terms of the credit facility
which expires in July 1999, the Company must maintain various financial
covenants. Any borrowings under this agreement bear interest at either LIBOR
plus 1% or at the Lender's "prime" lending rate, such rate determined at the
discretion of the Company. As of July 17, 1998, there were no borrowings under
the credit facility.
21
<PAGE> 23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Annual Report on Form 10-K.
1. The following consolidated financial statements of Network Appliance,
Inc. are filed as part of this Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets -- April 30, 1998 and 1997
Consolidated Statements of Income for the years ended April 30, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended April 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended April 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
The following financial statement schedule of the Company is filed in
Part IV, Item 14(d) of this Annual Report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedule
or because the information required is included in the consolidated
financial statements or notes thereto.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
2.1(1) -- Agreement and Plan of Reorganization, dated as of March 17,
1997, between the Registrant and IMC, a California
corporation
2.2(1) -- Agreement of Merger between the Registrant and IMC as filed
with the California Secretary of State on March 17, 1997
3.1(2) -- Restated Articles of Incorporation of the Company
3.2(3) -- Bylaws of the Company
3.3(8) -- Amendment to the Restated Articles of Incorporation of the
Company, filed December 18, 1997
4.1(3) -- Reference is made to Exhibits 3.1 and 3.2
4.2(3) -- Specimen Common Stock certificate
4.3(3) -- Amended and Restated Investors' Rights Agreement, dated
September 23, 1994, among the Company and the investors and
the founders named therein, as amended
4.4(3) -- Amended and Restated Shareholders Agreement, dated September
23, 1994, among the Company and the employee holders and the
Preferred Stock investors named therein
4.5(3) -- Forms of Warrants to Purchase Shares of Series A and Series
C Preferred Stock
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.1(3), (4) -- Distributor Agreement, dated June 1, 1993, by and among the
Company, Itochu Corporation and CTC Supply Sales
10.2(3) -- Forms of Indemnification Agreements entered into between the
Company and its directors and officers
10.3(3) -- The Company's 1993 Stock Option/Stock Issuance Plan
10.4(3) -- The Company's 1993 Stock Incentive Plan
10.5(3) -- The Company's Employee Stock Purchase Plan
10.6(3) -- Series C Preferred Stock and Common Stock and Warrant to
Purchase Series C Preferred Stock Purchase Agreement, dated
September 23, 1994, among the Company and the purchasers
named therein
10.7(3) -- Office lease dated October 21, 1993, between the Company and
Vanni Business Park General Partnership ("Vanni") and Office
Lease Agreement, dated October 20, 1994, between the Company
and Vanni
10.8(3) -- Agreement dated June 19, 1995, between the Company and
Imperial Bank, as amended, Promissory Note issued thereunder
and ancillary documents
10.9(3) -- Settlement Agreement and General Release, dated June 28,
1995, between the Company and Michael Malcolm
10.10(3) -- Security and Loan Agreement, Credit Terms and Conditions and
General Security Agreement between the Company and Imperial
Bank, dated August 31, 1994, as amended
10.11(5) -- Facility sublease, dated August 9, 1996, by and between S3,
Inc. and the Registrant
10.12(6) -- The Company's Amended 1995 Stock Incentive Plan
10.13(6) -- The Company's Special Non-Officer Stock Option Plan
10.14(7) -- Facility lease, dated August 18, 1997, by and between the
McCandless -- San Tomas No. 2 and the Registrant
10.15 -- Agreement of Purchase and Sale, dated June 11, 1998, by and
between 495 Java Drive Associates, L.P. and the Registrant
10.16 -- Operating lease agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.17 -- Purchase Option Agreement, dated June 11, 1998, by and
between 475 Java Drive Associates L.P. and the Registrant
10.18 -- Line of credit agreement dated July 10, 1998, between the
Company and Wells Fargo Bank, National Association
16.1(3) -- Letter Regarding Change in Independent Auditors
21.1 -- Subsidiaries of the Company
23.1 -- Independent Auditors' Consent
24.1 -- Power of Attorney (see signature page)
27.1 -- Financial Data Schedule
27.2 -- Restated Financial Data Schedules
27.3 -- Restated Financial Data Schedules
27.4 -- Restated Financial Data Schedules
</TABLE>
- ---------------
(1) Previously filed as an exhibit with the Company's Form 8-K dated March 17,
1997.
(2) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 25, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-97864).
23
<PAGE> 25
(4) Confidential treatment requested as to certain portions of these exhibits.
(5) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 7, 1997.
(6) Previously filed as an exhibit with the Company's Annual Report on Form 10-K
dated July 23, 1997.
(7) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated December 5, 1997.
(8) Previously filed as an exhibit with the Company's Quarterly Report on Form
10-Q dated March 6, 1998.
(b) Reports on Form 8-K.
None.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 3, 1998.
NETWORK APPLIANCE, INC.
By: /s/ DANIEL J. WARMENHOVEN
------------------------------------
Daniel J. Warmenhoven
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ DANIEL J. WARMENHOVEN President and Chief Executive September 3, 1998
- --------------------------------------------------- Officer, Director (Principal
(Daniel J. Warmenhoven) Executive Officer)
* Chairman of the Board, September 3, 1998
- --------------------------------------------------- Director
(Donald T. Valentine)
* Vice President Finance and September 3, 1998
- --------------------------------------------------- Operations and Chief Financial
(Jeffry R. Allen) Officer (Principal Financial
and Accounting Officer)
* Director September 3, 1998
- ---------------------------------------------------
(Carol A. Bartz)
* Director September 3, 1998
- ---------------------------------------------------
(Larry R. Carter)
* Director September 3, 1998
- ---------------------------------------------------
(Michael R. Hallman)
* Director September 3, 1998
- ---------------------------------------------------
(Robert T. Wall)
*By /s/ DANIEL J. WARMENHOVEN President and Chief Executive
---------------------------------------------- Officer (Principal Executive
(Daniel J. Warmenhoven) Officer)
</TABLE>
25
<PAGE> 27
NETWORK APPLIANCE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful account:
1998........................................ $ 330 $ 550 $ 69 $ 811
1997........................................ 330 -- -- 330
1996........................................ 220 110 -- 330
Excess and obsolescence inventory reserve:
1998........................................ $3,016 $1,302 $1,333 $2,985
1997........................................ 1,043 2,551 578 3,016
1996........................................ 345 698 -- 1,043
</TABLE>
26
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
23.1 -- Independent Auditors' Consent
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Shareholders of Network Appliance, Inc.:
We consent to the incorporation by reference in Registration Statement Nos.
33-99638, 333-25277 and 333-40307 on Form S-8 of our report dated May 8, 1998
(July 17, 1998 as to Note 11), appearing in this Annual Report on Form 10-K/A
of Network Appliance, Inc. for the year ended April 30, 1998.
/s/ Deloitte & Touche LLP
San Jose, California
September 1, 1998
